US payrolls numbers are top of the data diary this week along with global PMIs. But as David Pollard reports, this month’s employment report could be viewed with some suspicion, thanks to the impact of Hurricane Harvey.
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The Federal Reserve isn’t likely to raise rates once it begins its two-day meeting on Halloween. But don’t bet against a snowfall or a rate hike come December.
Robert A. Dye, chief economist for Dallas-based Comerica, said he expects the Fed to raise rates by a quarter-point at the Fed policy committee meeting Dec. 12-13.
The Fed has raised rates twice in 2017, once in March and another time in June. The benchmark short-term rate is now in a range of 1% to 1.25%.
For consumers, of course, another Fed rate hike would drive up the cost of borrowing. So you’d pay more in interest when you use a credit card to pay for dinner out or buy new clothes, if you don’t pay off the bill every month. The cost of old balances that built up on many variable rate credit cards climbs too.
Higher rates also mean it’s more expensive to take out a car loan and other loans.
If interest rates shoot up too quickly, experts say, there’s more risk that car sales could slow down further. In addition, millennials could find themselves shut out of of buying a new home if mortgage rates rise dramatically in the next several months, as well.
Dye, who visited clients in Detroit Tuesday at an event at the Little Caesars Arena, said the Fed will continue to tap on the brakes and likely will raise rates two or three more times in 2018.
He said the people who bet on the direction of rate hikes in the futures markets are putting the odds of a December hike around 98%.
“That’s pretty much a done deal,” Dye said.
“The Fed knows those expectations are really, really high. So if they had a problem with it, they’d be talking it down. The fact that they’re not talking it down tells me that it’s almost a sure thing at this point.”
We’ve been chugging along ever since the end of the Great Recession — which began in December 2007 and ran through June 2009.
The current U.S. economic expansion has been slow at many points but it does have the distinction of now being part of the 100-month club. Only two other U.S. economic expansions — one in the early 1970s and another in the 1990s — lasted 100 months or more.
The longest expansion kept going 10 years, running from March 1991 to March 2001, according to the official National Bureau of Economic Research Business Cycle Dating Committee.
Lately, the U.S. economy’s strong labor market, low energy prices and a resurgence in manufacturing are supporting a continued economic expansion. We’re getting a boost from what the experts call a “synchronized global expansion” where major economies across the world are on a far better footing.
“We’re starting to see this global lift right now,” Dye said.
Anyone putting money into a 401(k) knows that the Dow Jones industrial average has steadily kept breaking records, crossing the 23,000 mark and marching forward.
All that economic good news now means that several economists see little reason for the Fed to sit tight and not raise rates in the future.
Mark Zandi, chief economist for Moody’s Analytics, said the Fed has room to raise rates in December, given that the job market is operating at full employment.
“Unemployment will fall below 4% by this time next year under most scenarios,” Zandi said. “Wage growth is also picking up.”
Zandi said he’d put a 75% probability on the chances for a quarter-point rate hike in December.
The only obstacle to a potential rate hike on the horizon now is that inflation is below the Fed’s target level of 2%, Zandi said. The core rate of inflation was unchanged for September at 1.7% for the fifth month straight.
Diane Swonk, CEO of DS Economics in Chicago, wrote in an Oct. 11 report that the Fed is expected to raise rates one last time this year at the December meeting despite some push back from some Fed policy makers.
Going forward, experts are far more uncertain about how many rate hikes we could see in 2018 and beyond.
We’re seeing growing friction between monetary hawks and doves.
Monetary doves at the Fed want to hold off on rate hikes, given concerns that the inflation rate remains low. Pushing up rates too quickly risks hurting the economy and leading to job cuts.
Hawks are more concerned about the economy overheating and the possibility of higher inflation in the future.
On top of that, there’s been much worry about who will head up the Federal Reserve.
Fed Chair Janet Yellen’s term expires in early February. President Donald Trump has been meeting with candidates, including Yellen, and could announce his pick soon.
In the running: Federal Reserve Governor Jerome Powell, Stanford economist John Taylor and former Fed Governor Kevin Warsh.
Right now, many economists don’t see a recession ahead.
Dye, for example, put the odds for a recession at 20% or so in 2018 — if we see tax reforms and a boost to infrastructure spending as expected. The odds for a recession jump to 25% or so without such action out of Washington, he said.
He’d put the odds of a recession at 30% to 35% for 2019 — depending on tax reform and fiscal stimulus out of Washington.
But Dye said he believes it’s possible for the U.S. economic recovery to keep going into extra innings — maybe even pushing this economic recovery into 120 months to 130 months.
“There’s no time stamp that says we’ve come this far, so now we have to go into a recession,” he said.
Contact Susan Tompor: email@example.com or 313-222-8876. Follow Susan on Twitter @Tompor.
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